IGCSE/A‑Level Economics – Globalisation and Trade Restrictions: Protecting Declining (Sunset) Industries

1. The Basic Economic Problem & the Production Possibility Curve (PPC)

• Scarcity: Unlimited wants but limited resources → societies must answer three allocation questions:
  1. What goods and services should be produced?
  2. How should they be produced?
  3. For whom should they be produced?
• Economic vs. Free Goods:
  • Economic goods are scarce and have a price (e.g., a smartphone).
  • Free goods are abundant and have no price (e.g., air).
• Factors of Production: Land, labour, capital, entrepreneurship.
• Production Possibility Curve (PPC):
  • Shows the maximum combinations of two goods that can be produced when all resources are fully and efficiently employed.
  • Key features:
    • Points on the curve – efficient production.
    • Points inside the curve – under‑utilisation (inefficiency).
    • Points outside the curve – unattainable with current resources.
    • Opportunity cost – moving from one point to another requires giving up some of the other good.
    • Outward shift – economic growth (more resources or better technology).

  

2. Allocation of Resources (Demand, Supply, Price Determination, Elasticities, Market Systems, Market Failure, Mixed Economy)

2.1 Demand and Supply

• Law of Demand: ceteris paribus, as price rises, quantity demanded falls.
• Law of Supply: ceteris paribus, as price rises, quantity supplied rises.
• Market equilibrium: where Q_d = Q_s and the market price is P_e.
• Shifts vs. movements:
  • Movement along a curve = change in quantity due to a price change.
  • Shift of the curve = change in any non‑price determinant (e.g., income, tastes, technology).

2.2 Elasticities

Elasticity	Formula	Interpretation	Typical determinants
Price elasticity of demand (PED)	\(\displaystyle \frac{\% \Delta Q_d}{\% \Delta P}\)	Measures responsiveness of quantity demanded to a price change.	Availability of substitutes, proportion of income spent, necessity vs. luxury, time horizon.
Price elasticity of supply (PES)	\(\displaystyle \frac{\% \Delta Q_s}{\% \Delta P}\)	Measures responsiveness of quantity supplied to a price change.	Time period, spare capacity, mobility of factors, nature of the good.
Income elasticity of demand (YED)	\(\displaystyle \frac{\% \Delta Q_d}{\% \Delta Y}\)	Positive for normal goods, negative for inferior goods.	Type of good (necessity, luxury), consumer preferences.
Cross‑price elasticity of demand (XED)	\(\displaystyle \frac{\% \Delta Q_{d1}}{\% \Delta P_{2}}\)	Positive for substitutes, negative for complements.	Degree of substitutability/complementarity.

For sunset industries, demand is often price‑inelastic (|PED| < 1) because few close substitutes exist, making a tariff relatively effective at protecting domestic output.

2.3 Market Systems

• Market‑based (price) system: Resources allocated by price signals; firms respond to profit incentives.
• Command (planned) system: Central authority decides what, how and for whom to produce.
• Mixed economy: Combination of market forces and government intervention.
  • Arguments for mixed economies: corrects market failures, provides public goods, promotes equity.
  • Arguments against mixed economies: can lead to inefficiency, bureaucracy, and distortion of price signals.

2.4 Market Failure

• Definition: Situation where the market does not allocate resources efficiently.
• Common types (required by the syllabus):
  • Public goods – non‑rival and non‑excludable (e.g., street lighting).
  • Merit goods – under‑consumed if left to the market (e.g., education).
  • Demerit goods – over‑consumed if left to the market (e.g., cigarettes).
  • Externalities – spill‑over effects on third parties (positive or negative).
  • Information asymmetry and monopoly power.

3. Micro‑Decision‑Makers

3.1 Households

• Utility maximisation: Choose a combination of goods that gives the highest satisfaction subject to income and prices.
• Factors influencing spending, saving and borrowing:
  • Income level and distribution.
  • Interest rates (cost of borrowing, reward for saving).
  • Consumer confidence and future expectations.
  • Age, family size, cultural habits.
  • Availability of credit.

3.2 Firms

• Profit maximisation: Produce where MR = MC.
• Cost concepts: fixed, variable, average (AC), marginal (MC).
• Economies of scale: long‑run average cost falls as output rises.
• Types of firms (by sector):
  • Primary (extraction), secondary (manufacturing), tertiary (services).
  • Private, public, state‑owned.
• Mergers (required in 3.4.3):
  • Horizontal – same industry.
  • Vertical – different stages of production.
  • Conglomerate – unrelated industries.

3.3 Labour Market

• Demand for labour: Derived from the marginal product of labour (MPL) and the price of the output.
• Supply of labour: Influenced by wages, working conditions, demographics, and non‑monetary motives.
• Wage determination in a competitive market: intersection of labour demand and supply curves.
• Common government interventions:
  • Minimum wage – raises the floor price of labour; can create a surplus (unemployment) if set above equilibrium.
  • Training programmes – shift labour supply rightwards (more skilled workers).
• Unemployment types (required in 3.3.5):
  • Structural – mismatch of skills/locations.
  • Frictional – short‑term job search.
  • Cyclical – due to downturns in aggregate demand.
• Diagram (labour‑market) placeholder:

  

3.4 Money & Banking (brief)

• Functions of money: medium of exchange, store of value, unit of account.
• Banking creates credit through the fractional‑reserve system, influencing the money supply and interest rates.

3.5 Division of Labour

• Definition: Breaking production into specialised tasks.
• Advantages: higher productivity, skill development, economies of scale.
• Disadvantages: worker monotony, dependence on others, vulnerability to disruptions.

4. Government & the Macro‑Economy

4.1 Fiscal Policy

• Components: Government spending (G) and taxation (T).
• Aggregate demand: AD = C + I + G + (X‑M).
• Expansionary fiscal policy: ↑G or ↓T → ↑AD → higher output & employment (short‑run).
• Contractionary fiscal policy: ↓G or ↑T → ↓AD → lower inflationary pressure.

4.2 Monetary Policy

• Administered by the central bank (e.g., Bank of England, Federal Reserve).
• Tools:
  • Official interest rate (base rate).
  • Open‑market operations (buying/selling government securities).
  • Reserve requirements for commercial banks.
• Lower interest rates → cheaper borrowing → ↑ investment and consumption.

4.3 Supply‑Side Policies

• Goal: improve long‑run productive capacity.
• Examples:
  • Deregulation and competition policy.
  • Investment in education, training and research.
  • Tax incentives for R&D and capital formation.
  • Infrastructure development (roads, ports, broadband).

4.4 Macro‑Economic Objectives

Goal	Key Indicator	Typical Policy Response
Economic growth	Real GDP growth rate	Supply‑side reforms, expansionary fiscal/monetary policy (short‑run)
Low unemployment	Unemployment rate	Expansionary fiscal/monetary policy, training programmes, minimum‑wage adjustments
Price stability	Inflation rate (CPI)	Monetary tightening, fiscal restraint
External balance	Current‑account balance	Exchange‑rate policy, trade‑policy measures, supply‑side reforms

5. Economic Development

• Living standards: Real GDP per capita, Human Development Index (HDI), life expectancy, literacy rates.
• Poverty:
  • Absolute poverty – e.g., living on less than $1.90 a day.
  • Relative poverty – living below a set percentage (often 60 %) of median national income.
• Population dynamics: Growth rate, age structure, urbanisation – affect labour supply and demand for goods/services.
• Development gaps: Differences in income, health, education between countries; explained by technology, institutions, capital accumulation, human capital, and openness to trade.

6. International Trade & Globalisation

6.1 Specialisation & Comparative Advantage

• A country should produce the goods for which it has the lowest opportunity cost and trade for the rest.
• Result: higher world output and mutual gains from trade.

6.2 Benefits of Free Trade

• Greater variety of goods at lower prices for consumers.
• Economies of scale for exporters → lower average costs.
• Technology transfer, increased competition → innovation and productivity gains.

6.3 Costs / Risks of Free Trade

• Domestic industries that are not competitive may contract → job losses.
• Dependence on imported inputs can create vulnerability to external shocks.
• Potential widening of income inequality if gains are unevenly distributed.

6.4 Multinational Corporations (MNCs)

• Operate in several countries, moving capital, technology and managerial expertise.
• Potential benefits: host‑country growth, skill development, balance‑of‑payments inflows.
• Potential concerns: profit repatriation, market dominance, crowding‑out of local firms.

6.5 Foreign‑Exchange (FX) Rates & the Current Account

• FX rate determines the price of imports and exports in domestic currency.
• Current account = Trade balance + Net income from abroad + Net current transfers.
  • Surplus → net lender to the rest of the world.
  • Deficit → net borrower.

7. Trade Restrictions – Why Governments Protect Declining (Sunset) Industries

7.1 What is a Sunset Industry?

A sector experiencing long‑term structural decline because of technological change, shifts in consumer preferences, or more efficient foreign competition. The decline is permanent rather than a short‑run shock.

7.2 Main Reasons for Protection

1. Employment preservation – avoids large‑scale job losses in regions heavily dependent on the industry.
2. Social stability – reduces poverty, unrest and out‑migration from affected communities.
3. Strategic importance – some declining sectors (e.g., defence‑related manufacturing) retain national‑security relevance.
4. Transition time – gives the economy a period to re‑skill workers and re‑allocate capital to more productive uses.
5. Political pressure – unions, lobby groups and local MPs can influence policy decisions.

7.3 Trade‑Restriction Tools Used for Sunset Industries

Tool	How It Works	Typical Use for Sunset Industries
Import tariff	Tax on each unit of imported good; raises its price.	Reduces the price advantage of cheaper foreign substitutes.
Import quota	Physical limit on the quantity of a good that can be imported.	Directly caps competition, protecting domestic output.
Export subsidy	Government payment to domestic producers per unit exported.	Boosts revenue and encourages firms to stay in business.
Import licensing	Requirement to obtain permission before importing certain goods.	Allows selective admission of imports, often with stringent criteria.
Anti‑dumping duty	Additional tariff when foreign firms sell below cost.	Counters predatory pricing that would otherwise drive the industry out.

7.4 Economic Theory Behind Protection

In a free‑trade equilibrium, the domestic price (P_d) equals the world price (P_w). If P_w is below the industry’s marginal cost (MC), the industry contracts.

With a tariff t:

If P_effective ≥ MC, domestic producers can continue operating, albeit at a higher price for consumers. The same logic applies to quotas (which shift the import‑supply curve leftward) and subsidies (which shift the domestic supply curve rightward).

7.5 Evaluation – Pros and Cons

Advantages

Disadvantages

Short‑term reduction in unemployment and social disruption. Preserves specialised skills and capital that could be redeployed later. Supports regional development policies and maintains social cohesion. Provides time for workers to acquire new skills (re‑training programmes).

Resources remain in low‑productivity sectors → long‑run inefficiency and lower overall growth. Consumers pay higher prices and have reduced choice. Fiscal cost of subsidies and administrative burden of quotas/licences. Risk of retaliation from trading partners → trade wars. May breach WTO rules, leading to disputes and possible sanctions. Delays necessary structural adjustment, potentially increasing future unemployment.

7.6 Diagrammatic Illustration (Suggested)

7.7 Real‑World Case Studies

7.7.1 British Textile Industry (1970s‑1980s)

• Faced massive competition from low‑cost Asian producers.
• Government response: temporary import quotas, modest export subsidies and a short‑term tariff relief package.
• Outcome:
  • Employment continued to fall, but the rate of decline slowed, giving workers time for retraining.
  • Measures attracted criticism for high fiscal cost and for delaying necessary structural adjustment.

7.7.2 US Steel Industry (2000s)

• Decline due to cheaper imported steel and overcapacity abroad.
• Protection tools: anti‑dumping duties and temporary import quotas (Section 232 tariffs).
• Result: short‑term job preservation, but long‑run competitiveness remained weak; WTO challenged the measures.

8. Summary – Key Points to Remember

1. Sunset industries are in structural decline; protection aims to ease the transition rather than create permanent viability.
2. Trade‑restriction tools (tariffs, quotas, subsidies, licences, anti‑dumping duties) raise the effective price of imports or boost domestic competitiveness.
3. Protection can deliver short‑term employment and social stability, but usually incurs long‑run efficiency losses, higher consumer prices, fiscal costs and possible WTO disputes.
4. Policy decisions must be weighed against the four macro‑economic objectives (growth, unemployment, price stability, external balance) and broader development goals.
5. A solid grasp of the whole syllabus—from the basic economic problem and PPC to globalisation and trade‑restriction evaluation—enables a balanced, exam‑ready answer.